How large is the economy-wide rebound effect in middle income countries? Evidence from Iran

Recent research suggests that the economy-wide rebound effect is near 100% in several high-income countries. Is it similarly large in middle-income countries? Iran is a middle-income country that is also a large oil producer. We estimate the economy-wide rebound effect for Iran using a structural vector autoregressive model and quarterly data from 1988:3 to 2018:1. We identify the structural shocks by independent component analysis, a statistical identification technique that does not require us to impose restrictions based on economic theory on the model. The results show that in response to an energy efficiency shock energy use falls initially but returns to near its original level over time. The economy-wide rebound effect in Iran is 84% after 6 years and its confidence interval includes 100%. This implies that policies that encourage energy efficiency innovation will have limited long-term impact on energy use. •An SVAR is used to estimate the effect of energy efficiency shocks on energy use.•Independent Component Analysis (ICA) is used to identify the SVAR.•The confidence interval of the economy-wide rebound effect in Iran includes 100%.•Large rebound may be common across middle and high income countries.